Credit card balance transfers impacted by interest rates

In its Aug. 8, 2006, FOMC Statement, the Federal Reserve announced plans to leave U.S. interest rates unchanged for the first time in two years. But for credit card users, the ongoing cycle of rate hikes had already had its effect. Advancing interest rates have caused credit card-issuing banks to jack up fees and restrictions for credit card balance transfers.

As interest rates climbed, many consumers took advantage of balance transfer offers to move debt to low APR credit cards. Urgency to transfer balances was heightened as cardholders became more sensitive to what rates they were paying. While no figures are available on the number of consumers who are currently making use of balance transfer offers, there seems to be a community of consumers who, amid rising interest rates, lessened their financial burdens by negotiating lower fees or by transferring balances to low APR credit cards -- aiming to minimize finance charges in any way they could.

Credit card issuers offer low-rate balance transfer promotions in an effort to draw loyal customers, especially those with a record of paying their bills on time, explains the American Bankers Association, with the cards often including a rewards feature to encourage customers to stay with the banks. Banks are also betting that with their low-rate offers, they stand to profit when consumers pay late, thereby breaking the deal's terms. Once an infraction occurs, the low rate generally disappears. Issuers in turn propel the rate into the double digits; some may raise it as high as 30 percent.

According to an Internet credit card website, the typical fixed-rate credit card is now at 14.4 percent, while a variable rate credit card is at 16.3 percent. However, you can find better offers online at sites like CreditCards.com.

Some credit card issuers offer 0 percent interest for six to 12 months on balances that are transferrx`ed to their cards, and others offer low fixed rates for as long as it takes to pay off your balance. However, consumers should keep in mind that fees and restrictions often apply to these promotions, so they should carefully read any fine print.

But as consumers have been seeking out ways to save amid swelling finance charges brought on by rising interest rates, some such deals have become tougher to come by. Credit card issuers are providing fewer offers and are increasing rates and restrictions on offers that are already available. As a result, it has gotten more expensive for consumers to take advantage of popular low-rate balance-transfer deals.

Higher interest rates impact all credit cards. Variable rate credit cards usually charge the prime rate plus a certain percentage, so they fluctuate along with short-term rates. Meanwhile, fixed-rate credit cards remain fixed only as long as the issuer wants them to. The fine print on most credit card offers indicates that the issuer has the right to change the terms "at any time, for any reason." In most cases, they provide only 15 days notice.

In August 2006, American Express hiked the fixed rate on balances transferred to its "Blue" credit card to 4.99 percent from 3.99 percent. Additionally, Chase and MBNA (which was acquired by Bank of America this year), have increased their caps on balance-transfer fees for some credit cards. A Bank of America spokeswoman reported that for years many of its credit cards had no ceiling on balance-transfer fees.

Until recently, most balance-transfer fees totaled 3 percent of the sum transferred to each credit card, up to a $75 maximum. But greater numbers of issuers are eliminating the ceiling on credit card balance transfer fees. As a result, if you transfer $10,000 in debt to a card with a 3 percent fee with no maximum, you could now pay $300 -- four times the $75 maximum fee charged a year or so earlier.

Bank-consulting firm R.K. Hammer notes that the lack of a cap with balance-transfer offers has become the new norm over the last 12 months. With pressure on fees, Hammer explains, cap elimination is one of the methods card issuers are using to grow profits.

Meanwhile, consumers may be seeing less mailings for balance transfer offers. That is because as interest rates have moved skyward, some credit card issuers are mailing out fewer balance transfer offers. The promotions that do come in the mail are increasingly for variable-rate, as opposed to fixed-rate, balance transfers, says market research firm Synovate. A common variable balance-transfer offer is 0 percent to 1.99 percent plus prime -- currently 8.25 percent to 10.24 percent, according to Synovate.

The increase in such offers is due to the higher costs of lending money for issuers amid higher interest rates, which makes it more difficult to provide low-rate, low-fee balance transfer deals. American Express explains that it looks at "a number of factors" in deciding on changes to its offers, including current interest rates.

In an attempt to expand their business and grow profitability, banks have also been boosting credit card fees of all types in recent years. In 2006, banks' income from penalty fees (including late and over-the-limit charges) are forecast to hit a record $18 billion, a 21.6 percent surge from two years before, says R.K. Hammer.

With banks making balance transfers more costly and difficult for consumers amid high interest rates, cost-conscious credit cardholders should first dial their creditors to request lower rates and fees on their plastic before seeking a lower APR card.

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